Is This a Great Time to Buy NLY (Annaly Capital Management) ?

What did NOT got me interested (i.e. the usual bulls’ spew):

  • It’s cheap on a __ and __ basis.
  • Dividend yield is ___.

What got me interested:

  • Yesterday’s announced dividend cut  appears to have been less worse than the street expected (or was it?).
  • NLY shares are down ~30% in 2013 (counterpoint: down does not mean cheap, nor does down mean it can’t go down further)
  • Many of the NLY promoters from earlier this year (both the smart and not-so-smart) have been thoroughly humbled and humiliated. I love these kinds of situations (which doesn’t mean shares cannot decline further).
  • A cursory examination of the NLY historical stock price seems to show that very negative down years tend to be followed by positive years. The pattern recognition side of me tells me to BUY BUY BUY (but past patterns are not indicative of future trajectory).
  • One rarely sees a best-in-class operator (that has survived even as its competitors went out of business) shares beat up this badly, in a year’s time.

What concerns me, what needs to be better understood:

  • True Capitulation? - A bull who has been dead wrong for quite some time has not capitulated. I’d love to see him capitulate, as he seems to be long NLY for all the wrong reasons.
  • Understanding the Business, and its Economics - I would need to do a deep dive to understand the business model and its economics, especially as it pertains to macro (specifically interest rates, spreads, mortgages, housing). A friend wrote: “Agency reits are basically long interest rate risk always and can’t go to duration neutral by mandate because they don’t take on credit risk.  Correlation between mortgage rates and treasuries is strong enough for housing and credit to be more of a secondary concern.”
  • Management Quality is of Paramount Importance- Michael Farrell passed away last year. Annaly has been around forever, and its management respected the entire time. How honest and competent are the original management’s successors? How much time does the old guard have remaining? Is this your father’s NLY?

I may initiate a long today (“trade first, analyze later”). My continued analysis may be updated in this post.

Is This How and Why the Nasdaq Will Reach New All Time (Nominal) Highs in Coming Years?

The Nasdaq is “only” ~20-25% off its 2000 all-time highs. The S&P 500 and Dow hit all-time highs this year. The Nasdaq looks “relatively” inexpensive. Some market participants, therefore, have naturally begun to wonder whether the Nasdaq will hit new all-time highs in coming years.

It is my belief that the advent and adoption of electronic trading in the 1990s (coinciding with the revolutionary and transformative effect of the internet on the real economy) played a key role in propelling the NASDAQ to its euphoric heights.

Then I saw the following recently, and thought that its launch and eventual adoption would help the NASDAQ reach new heights:

Robinhood webpage

I might add that robinhood is backed by Google Ventures, Andreesen Horowitz, and other venture investors.

I personally believe that a 1998-like market correction in the near future, coupled with these type of developments will make it increasingly likely that we will see the NASDAQ hit new highs. Robinhood (and Hugh Hendry’s very public faux-capitulation) may serve as immediate term contrary signals (say within the 1-4 quarters), but a medium term leading indicator (1-2 years).

The US economy does not appear to be experiencing the structural improvements, and productivity gains it was experiencing back in the 1990s. As a result, I wonder how long-lasting new highs in NASDAQ will last this time around (that is, if it were to occur).

Perhaps twitter today is what the yahoo message boards was in the 1990s.

Now, if only innovators were to find a way to reduce the mean and median investment banking / advisory fees (IPO, M&A, etc) , say to <1% of capital/deal sizes… that would serve as a free-market (and not centrally planned) solution to redistributing wealth away from Wall Street, and back to Main Street + Tech.

Although I hope to one day become a half-decent macro investor, I will continue to focus on securities selection for the time being (which I personally believe will lead to superior results, measured both in alpha and beta terms, and dollars and cents).

72% of Investors Expect Twitter’s Stock Price to Decline or Stay Flat (You know what this means…)

I’ve been bullish twitter for the last 2 years (as others can attest to; go ahead and verify) and am happy to see that it has gone public under favourable market conditions. I find it interesting that 68% of investors believe twitter’s stock price will close lower than $44.90/share within the next 6 months:

Yes, twitter’s valuation is absurd. Yes, the business is (currently) ponzi-financed. Yet investors’ pessimism is real. And rarely is such lop-sided sentiment perfectly correct. Such sentiment is not indicative of euphoria, but of a healthy (?) dose of skepticism. Granted, sometimes crowded sentiment ends up quite correct (I believe investors were collectively pessimistic regarding GroupOn when it went public…and they were proven correct).

Now, the valuation is most definitely reflective of exuberant public and private capital markets.  But shorting on valuation alone is as wise as buying on valuation alone. For example, if you short a zero revenue business at $x, it can go to $nx (where n >= 2)  before it goes to zero (or not)…

This post is not meant to be a comprehensive analysis of the shares of twitter, but to highlight the lop-sided sentiment against twitter shares.

You should assume that I am the proverbial “patsy” on the table, and that there are smart people who actually know a thing or two about twitter’s business prospects.

Make Way For The Coming of King Dollar

My favorite long idea currently is going long the $ (not in terms of return to risk expectation, but as far as likelihood is concerned) for the next 12-24 months. This isn’t to say there can’t/won’t be counter-trends along the way. If/when there are, I recommend buying the dip. Here are the reasons I believe we go higher for the dollar within the next 12-24 months, surpassing the highs in 2008:

  • Capital has been fleeing, is fleeing, and has good reason to continue fleeing Europe, China, and the rest of the world. The economies outside of US are not doing well, and their central banks face pressure to ease…all clearly good for the $.
  • The US economy has seen better days (especially as far as employment, median/average wages, etc go), but it is by far the best house in a bad neighborhood. US economic growth and the drivers for economic growth remain far superior relative to the rest of the world. Even as other countries’ central banks/governments face pressures to ease, The US Federal Reserve faces pressure to tighten (and for good reason). Higher rates and/or the expectation of higher rates is clearly attractive to the inflow of capital.
  • US banks are far stabler than their counterparts in Europe and China. Interest rate and yield curve expectations/trends in the US are also favorable as far as forward expectations on bank profitability/safety are concerned.
  •   The US remains far politically/socially stabler compared to Europe, China, and the rest. Greater safety and growth prospects seem very positive for the $.

The implications of a strong dollar within the next 12-24 months on the real economy, commodities, US equities, and other asset classes are probably a lot more interesting, but will leave that for you to figure out. Also, I would recommend studying correlations, but to the extent it helps you think about causation. Correlations can and do change, and money is often made when discounting the obvious correlation, and betting on an unexpected ‘regime change’.

Going forward, you should assume I will write far more about macro, sector, and/or theme related investment/trade ideas, and far less about single-name ideas.

Long US Municipal Bonds and Long China: The Knife Catcher’s Edition

US Municipal Bonds

Reasons that buying muni bonds now makes sense:

  • The news wire/headlines are dominated by (a) “so and so bonds are down x%, haven’t been down this much since ___.” And (b) so and so funds are down y% in month of ___. and (c) so and so are trading at a discount to NAV, compared against deviation from NAV.
  • Some of the yields relative to taxable equivalents seem sensible, especially if one pursues a hedged approach (hedge out the rate risk).
  • The prevailing story/belief is that the recent selling is partially driven by ‘retail’ selling.

Reasons I remain cautious:

  • I’m not sure if the ‘retail is selling’ thesis is a sufficient one, especially seeing that munis investor base is retail (albeit more affluent retail).
  •  Unclear how the interest rate risk works here.
  • Would have to better understand what’s going on in “TOB” land.
  • x% discount to NAVs can turn into 3x% discount to NAV

Current view: I believe now is the time to start buying, or at least start evaluating/planning a “buy munis” plan.


Reasons going long China makes sense:

  • SHIBOR this, “China’s Lehman moment that”, China’s 2008 this… you get the idea. That’s when to buy.
  • Both the current A shares level and the downward velocity seem predictive of positive return to risk, over longer duration.
  •  The bears thesis is widely known; markets are not the economy; it’s discounting some pretty bad outcomes.

Reasons to be cautious/wait:

  •  US 2008 preceded march 2009, i.e. if this is China’s 2008, why rush? We’d need a few events/failures.
  • A very smart China manager is very bullish China (in terms of the real economy), BUT he’s not bullish the A shares; he’s bullish private companies, though proper security selection/due diligence is critical. his rationale (in a nutshell) is that A shares are wealth distribution mechanism of the political class, whereas the private shares aren’t necessarily.
  • I don’t think these securities are worthless

Current view: Start buying and/or come up with a buy plan. Lest we forget, China is the world’s 2nd economy, blah blah blah.

Linn Energy - The Brouhaha Edition (Working Version)

A certain Keith McCullough and Jim Cramer recently got into a very public brouhaha over Linn Energy LLC (“LINE”) and LinnCo LLC (“LNCO”). I personally enjoy these battleground stocks very much (in part, because I’ve demonstrated the ability to make money off some of them) and wanted to post my initial thoughts. I may update this post periodically, and keep it as a ‘working version’ document indefinitely.

You should assume this post is for educational, conversational, and entertainment purposes. Below, I include reasons to:

(A) Buy/Hold

(B) Sell/Short and

(C) Open Questions and Thoughts

A few disclosures:

  1. I currently hold no position in LINE, LNCO.
  2. I am currently short another name in the same or similar space(s).
  3. I have not spoken privately with Jim Cramer, Keith McCullough, or any other bull/bear about LINE/LNCO for the purposes of this post.
  4. This post is subject to change and revision, at my full discretion, at any time.
  5. 1, 2, 3, and 4 may change at any time.

Reasons to Buy/Hold:

  1. High short interest (as a shorter duration risk factor) and/or perceived high high short interest.
  2. High dividend yield (From a behavioral/decision-science perspective, the holders and marginal buyers will hold on blindly until a dividend cut or similar negative event)
  3. Great Management team, and/or the perception of a great mgmt team - A certain “Larry Bird” hedge fund manager told me that the management team says they are the best in the industry and that they have best corp dev team. CEO says he is a 10.
  4. Their dependence on Wall Street may allow them to survive indefinitely (even if it’s a de facto ponzi). It’s a incestuous, unethical relationship between Wall Street/Consultants/Lawyers/Accountants and… Linn Energy. Linn Energy gives them fees, Wall Street gives it life blood. The other enablers provide a sense of legitimacy (“false walls of integrity”)
  5. No one knows how markets will behave tomorrow, so some of these “hedge” positions may end up benefiting them disproportionately and just when they need it.

Reasons Sell/Short:

  1. Flamboyant and promotional CEO (the kind of guy many like to see fail, or are never surprised when they do fail).
  2. Some accounting concerns, specifically pertaining to cash available to meet distributions. Novastar anyone.. or?
  3. Resembles a ponzi borrower* - They depend on external capital. How much would LINN be worth if Wall Street closed indefinitely? If the equity markets fell 20%? 30%? 40%? If interest rates went to ___ ?
  4. Has that roll-up stench.
  5. High short interest (as a longer duration predictive factor)
  6. High dividend yield (seems counter-intuitive, but higher yield means its currency is cheaper, so equity as currency is less valuable)

Open Questions and Thoughts:

  1. Is Linn Energy today more like a Fairfax Financial of 2006/2007, or more like an Enron?
  2. Need to better understand these “hedges” and their entire speculative/securities book. Need to talk to relevant parties with domain knowledge/familiarity.
  3. It’s a “battleground stock” - Jim Cramer/Leon Cooperman and Hedgeye/Barron’s are the public faces of the bull and the bear (a few others have chimed in, and I know it’s been on many people’s radar). I personally like battleground situations, and have demonstrated the ability to make money off of them…but they’re not for everyone.
  4. The equity price does not appear to be at an extreme (high or low), nor is the recent velocity (price change per unit time) noteworthy.. so it seems that on a market price action basis, there is no “fat pitch”.
  5. I’m going to assume I have no edge, and that I am the “patsy on the table”. I assume Kevin Kaiser, Leon Cooperman’s LINE analyst, and the other parties who are not publicly involved know more about LINE than I do.
  6. Some believe their “hedging” is unorthodox, aggressive.

My current opinion: LINE seems like a cross between an O&G operator, roll-up, and hedge fund. I’m not sure if LINE is more of a Fairfax Financial (of the 2006-2008 time period) or an Enron. My understanding of the Fairfax story is that the shorts were correct about most of the facts, but Fairfax nevertheless ended up surviving and prospering for the following reasons (see its stock price since 2006):

  1. The government did not act upon some of the red flags, specifically the tax-related ones.
  2. Fairfax (to its credit) made a very smart bet against subprime, and it paid off asymmetrically.

1. and 2. allowed Fairfax to ‘overcome’ the red flags. It happens. So LINE could also be a situation where the bears are right about pretty much everything, but a series of unexpected and unlikely events lets it survive and thrive indefinitely… or the bears are flat out wrong. Unlike Fairfax, the cost of being wrong seems higher in the case of LINE because you can get hurt badly both on the carry cost (i.e. dividend) and the risk that the principle rises in market value.

*Ponzi, in the Hyman Minsky sense -

Minsky argued that a key mechanism that pushes an economy towards a crisis is the accumulation of debt by the non-government sector. He identified three types of borrowers that contribute to the accumulation of insolvent debt: hedge borrowers, speculative borrowers, and Ponzi borrowers.

The “hedge borrower” can make debt payments (covering interest and principal) from current cash flows from investments. For the “speculative borrower”, the cash flow from investments can service the debt, i.e., cover the interest due, but the borrower must regularly roll over, or re-borrow, the principal. The “Ponzi borrower” (named for Charles Ponzi, see also Ponzi scheme) borrows based on the belief that the appreciation of the value of the asset will be sufficient to refinance the debt but could not make sufficient payments on interest or principal with the cash flow from investments; only the appreciating asset value can keep the Ponzi borrower afloat.

The Buy Gold Game Plan: The Special Situation Edition

LST first wrote about the short gold/miners game plan in August 8, 2011. Depending on how violently this decline/correction/crash continues, the buy gold as a special situation event “path” seems to be opening up. The long gold game plan is summarized below, and is only for those with exceptional intestinal fortitude. Note that this is long gold as a special situation, NOT as a fundamental ‘investment’. LST will not parrot the “fundamental case’ for gold, physical gold, etc.

Here are the conditions in which LST will buy gold:

  • Rumors of certain fund(s)/financial institution(s) blowing up due to GLD positions. Forced liquidations.
  • Rumors of certain other opportunistic funds buying gold/related positions at fire sale, liquidation, and below-market prices. Something like the European Sovereign bond purchases in Q4 2011 when MF Global failed.
  • The speed of this decline picking up even further; headlines (ideally even “main street” headlines) about gold prices not being this low since ___.
  • The initially buy the dip guys shutting up, and not mentioning the debasement, QE, Japan, Cyprus, etc. arguments. More and more talks about over the long term _________ .
  • People posting a list of miners who are most susceptible to bankruptcy and other forms of financial distress, if gold reaches x, or y. So and so miners need to raise capital or die.
  • If there is a corresponding surprise rate spike in JGBs or USTs… that would truly be icing on the cake.

Note that the above are some scenarios/triggers… a wish-list, if you will. The true list is longer, and only limited by LST’s imagination.

As to whether LST “thinks” the above or similar will happen: what LST thinks does not matter. LST is not in the business of forecasting/prognostication, but rather, in making decisions and/or bearing (as opposed to taking) risk. The above may all happen this week, within the next few quarters, or not at all. LST is keenly more interested in preparing how to react under so and so scenarios, rather than talking about what LST thinks WILL happen. In the interim, we should all sing “when you wish upon a star…”

Gold Miners: Value Trap, Short Term Buy, Generational Buying Opportunity, or None of the Above ?

LST is currently in the mood to play some late night macro jazz, so will jot down below a few (incoherent) thoughts regarding none other than… zee barbaric relic, and those who mine for them:

  • A few of LST’s indicators are signaling accumulate/buy (now, if not within the next few trading days), if not monitor VERY CLOSELY on the long side (especially for medium/long duration holding purposes);
  • A certain @Paul3222 says gold miners will be “stupid cheap” : “…when management stops destroying shareholder value. Or, when recoverable reserves are worth more than the company.”
  • @freegold , Hugh Hendry, and others of the uber-risk conscious mold (rightfully?) believe that one cannot hedge/price in the risk of nationalisation … whether that’s true, or whether the mere headline risk can drive miners to absurdly low prices, it’s something to bear in mind.
  • LST wondered whether Paulson’s 2012 trades gone wrong would be 2013 trades gone right (at some point in 2013)…such as gold/miners …
  • Impact of gold, gold-related ETFs on gold mining stocks (i.e. “market structure” issues of the secular variety)
  • “Gold fundamentals remain strong”
  • Eventual reversal of the short miners, long gld/physical trade?
  • and some food for thought, per @tejus_sawjiani :

2013 Counterintuitive Investment Theme #1: Betting on Paulson (?)

Thesis: Paulson & co’s failed trades in the last few years have tended to perform remarkably well in subsequent years. LST believes short Europe and/or long gold miners may present compelling reward vs. risk at some point in 2013 (if not now). So:

(1) Betting against Europe - Short a basket of EUR, short European sovereign bonds, and long European CDS.

(2) Betting on Gold Miners - The majors and the juniors, e.g. AU, NG, GFI (without loss of generality).

LST will likely do more work (it’s still in idea generation/evaluation stage, granted LST sometimes adheres to the “trade first, analyze later” philosophy a la Soros), possibly updating this post. Let’s examine the case against (1) and (2) (LST prefers the dialectic/socratic approach, rather than the more traditional b-school model where you start with your ‘case for’):

Case against / Counterarguments

(1) Why bet against Europe?

  • Europe is structurally flawed, but the problems are known, priced in.
  • Eurozone has stabilized, low rates are buying time for at risk countries such as Spain to solve its structural problems, e.g. employment.
  • The markets seem to respond favorably to incremental actions by the ECB.
  • The banking sector has been stabilizing, the systemic risk indicators are all pointing to calm.

(2) Why bet on gold miners?

  • The smart macro money is short or looking to short gold (their models say so!), confidence appears to be rising, as the Fed is giving some hope that QE and other “extraordinary” interventions will slow, if not start to reverse. The reflation trade in reverse…
  • Inflation in labor, fuel, etc. would not be good for margins.
  • “The risk premium goes up when the gold price goes up. Societies are more envious of your gold at $3000 than at $300. And there is no valuation argument that protects you against the risk of confiscation.” (Hugh Hendry)

LST wonders if the EUR USD needs to go higher - say 1.40 - before it’s time to short Europe. Similarly, LST wonders if gold needs to see a more meaningful correction (with similar pain in the miners) before going long gold miners.

Deconstructing the case against/counterarguments - LST is not sure yet, needs to gather more information, and think this through more. Having said that, LST likes the short Europe idea as LST can’t recall the last time Europe dominated the headlines.

On the Radar for 2013

These are the areas that currently interest LST, as we head into 2013:

(1) Frauds, Fads, & Failures - Never gets old. While these tend to be inherently of a single-name (and occasionally thematic) nature, it appears there are certain markets where macroeconomic froth/excess may intersect with the three Fs. Those remain of highest priority. Oh, and “activist” shorts are always high priority.

(2) REITs - This is an area where LST feels (relatively) comfortable, as far as getting up to speed, both on a macro and single-name basis. Will be (particularly) on the lookout for the crescendo of foolish, uneconomic, and short-term behavior. It seems markets all too often forget that “innovation” and “creativity” in finance (e.g. the REIT-ization of “non-traditional” names) are euphemisms for “hidden debt” and “hidden risks” and…all too often end in tears.

(3) Special Situation Longs - Names such as CNSI (as inspired by @mojoris1977 ) will take top priority. IRBT, INVN, and a few others are on the evaluation pipeline. Finally, will be monitoring acquisition and/or activist worthy names.

(4) High Yield Credit - Per one of LST’s recent posts…

(5) Japan, the Nikkei, and USD JPY - The recent performance of the USD JPY and Nikkei have gotten the attention of even lowly students of macro jazz such as LST.

(6) IPOs (particularly of the tech variety) - A few sources “familiar with the matter” expect that tech IPO land will be quite busy in 2013. Time will tell, but if supply increases in equity land, LST will be a very happy camper…